A Rollover for Business Startups (ROBS) is perhaps the best kept secret in business acquisition financing. A ROBS lets you use retirement savings (from a 401k or IRA) without facing early withdrawal penalties or taxes. You can use the funds for an SBA loan down payment, in conjunction with seller financing, or to cover 100% of your purchase. Guidant Financial is our recommended ROBS provider and can also help their clients apply for SBA loans to buy a business. You can schedule a free, no-obligation consultation with Guidant to learn more.
Business Acquisition Financing Options
|Funding Type||Good For|
|SBA Loans||Prime borrowers looking for the longest repayment terms and lowest interest rates.|
|Rollover for Business Startups (ROBS)||If you have $50K+ in a retirement account you can use it to buy a business or as a down payment for an SBA loan.|
|Seller Financing||The seller can finance part or all of your purchase. This works well with other financing sources, like ROBS or SBA loans.|
|HELOC & HEL||When you have 20%+ equity in your home, you can borrow against that equity to fund your business.|
|Family & Friends Loan||If you have wealthy friends or family members who believe in your business and want to invest.|
If you’re taking out a loan to buy a business, then the best option is an SBA loan. Since it’s the best option, we’ll primarily be focusing on them here in this article.
Here are the 5 most common loans to buy a business:
1. SBA Loans for Buying a Business
SBA loans are a great place to start when searching for business acquisition financing. Out of almost all forms of financing, SBA loans have the most competitive interest rates and longest repayment terms. However, the downside of working with an SBA lender is that it can be difficult to qualify, and even if you do the process can take 45-120+ days.
It’s typically easier to get approved for SBA financing to buy an existing business when compared to getting approved for startup financing. This is because the lender is able to better judge the existing business’s potential to repay a loan by looking at its track record, rather than pinning their hopes on a startup’s projections alone.
Most traditional lenders who offer multiple types of loans will often consider you first for an SBA loan because these loans are partially guaranteed by the U.S. Small Business Administration (SBA). It’s a safer bet for the lender, and if you don’t have enough collateral to secure a traditional bank loan, it could give you a better chance at getting approved.
SBA Loan Rates, Costs, & Terms
An SBA loan will typically carry similar terms and qualifications to a traditional bank loan. The lender is generally looking for prime borrowers with a strong business plan. It also may require some collateral to get approved.
Here are the typical rates, fees, and repayment terms of an SBA 7a loan to buy a business:
With an SBA 7a loan, you can borrow up to $5 million to put towards the purchase of a business. The lender won’t fund the entire purchase price, however, so you’ll need to put up a down payment between 10-20% of the amount you need.
SBA loan rates vary based on the current U.S. prime rate. They are typically around 6-9%, but you can check out our article for the current SBA loan rates.
SBA loans have a guarantee fee starting at 3% of the loan amount for loans over $150K. There may also be other fees associated with a loan, such as application fees, third-party closing costs, or prepayment fees.
The term of an SBA loan will vary depending on the type of business and what is being purchased. The maximum term for SBA loans is 10 years for working capital and 25 years for real estate.
Keep in mind that a longer term means lower monthly payments and better cash flow, but it also means that you are paying interest for a longer period of time. This could increase your total cost of capital if you repay the loan over the full term instead of getting a shorter term loan that you pay off quicker.
How to Qualify for an SBA Loan to Buy a Business
The SBA looks at a lot of information when determining whether or not you’re qualified for a loan, but there are five qualifications that primarily determine whether or not you get approved.
You can learn more about each qualification below, but the minimum qualifications for an SBA loan from South End Capital are a 680+ personal credit score, a profitable business, and a 20% down payment. Sign up for a free consultation to see how you can qualify for up to $5 million.
The 5 most important qualifications for an SBA loan to buy a business are:
Personal Credit Score
If your credit score is lower than 680, obtaining an SBA loan will be very difficult (click here to check your credit score for free). If this is you, we recommend speaking with someone about how you can improve it. To do that, you can read our complete guide on the best credit repair companies.
You should be prepared to put some of your own cash towards the purchase of the business. Without some skin in the game, a lender is unlikely to give you an SBA loan. Every deal is different, but most lenders expect at least 10-20% from the borrower and may require as much as 30% down.
One popular way of coming up with a down payment is to use money you’ve saved in a tax deferred retirement account, and a ROBS let’s you do just that without paying withdrawal penalties or taxes. You can qualify if you have $50k+ in a tax deferred retirement account. We recommend working with a ROBS professional, like Guidant, to help you through the process.
Even if the business you’re looking to buy is highly profitable, an SBA lender will still likely want you to put up some collateral for the loan. The reason is that no matter how well a business has historically performed, there is always a chance that it can fail. Sufficient collateral provides security in case the business goes belly up and you can’t pay back the loan.
Real estate – whether business or personal – is the most attractive form of collateral because it is most likely to retain its value. You may also be able to pledge equipment, vehicles, accounts receivable, and other business or personal assets as collateral.
Lenders typically discount the value of the collateral you pledge because the collateral can lose value over time, and they want to cover the potential costs associated with liquidating that collateral. So for example, if you have real estate worth $250,000 the bank might discount its value to 80%.
This would give you $200K of collateral for your loan. Collateral such as vehicles, equipment, and assets that don’t hold their value are discounted even more. You can read more about collateral and how it’s discounted by the lender in our guide on the collateral coverage ratio.
Lenders will expect you to have 3-5 years of direct industry experience at a managerial level or higher. Less than that will raise serious doubts that you will need to be overcome if you’re going to get the financing you need. If you don’t have that experience, then you’ll need to identify and hire a management team who has it.
If you don’t have much experience, one way to address that is with a solid 3-5 year business plan, complete with financial projections. Luckily, there’s easy to use business planning software out there that helps you cover all your bases. With the right software, you can end up with a great looking business plan even if you don’t have any tech or design skills.
Financially Strong Business
Lenders are typically more inclined to lend money to someone buying an existing business rather than someone launching their own startup. This is because the existing business has a financial track record, which makes assessing the likelihood the business will be able to repay the loan much easier.
Lenders prefer the business to have been operating for 2-5 years and will want financials to show that the business is profitable and your revenues are stable or growing. If the business is not profitable or has declining revenues, the lender will likely be skeptical that the business will be able to repay the loan.
If the business you’re looking to buy is profitable, you have a 20% cash down payment and a credit score above 680 (check here for free) you may qualify for an SBA 7a loan for business acquisition with South End Capital. They provide long-term SBA 7(a) loans of up to $5 million and offer a free consultation.
SBA Loan Application and Documents
When applying for a business acquisition loan, you will be asked to submit financial and other documents for the business. Here are the main documents you’ll need to submit:
The purchase agreement is the document that states:
- Final purchase price of the business
- What is being bought (stock or asset sale)
- What is required by the seller and buyer at closing
- Effective date that ownership of the business is transferred
- If seller will help with transition (and terms)
- Responsibility for existing liabilities
The lender needs the purchase agreement to verify the business’s purchase price and learn more details about the business, including whether some of what is being purchased can be considered collateral.
Before the purchase agreement, there may also be a Letter of Intent (LOI). This is less formal than the purchase agreement and sets out the preliminary framework for the business acquisition. Many lenders use this document to get their preliminary underwriting started, but they won’t fund without an executed purchase agreement.
Financial Documents for the Business
There are a variety of documents that the lender will need in order to evaluate the business’s financial condition. You should already have these in your possession from the due diligence process. They include such things as:
- Last 3 years business tax returns
- Year to date profit and loss, balance sheets, and cash flow statements
- Information on outstanding business debts
- Information on any long term contracts
- Complete list of business assets (including year, make, model, mileage/hours)
- Rent rolls if the business has tenants
- Business lease
- Organizational documents for the business (e.g. incorporation docs and business licenses)
- Business Plan
To learn more about the entire SBA loan process, read our article on how to apply for an SBA loan.
2. Rollover for Business Startups (ROBS)
A ROBS helps you access your retirement savings for a business acquisition without paying any taxes or early withdrawal fees. Plus, the funds are generally available in 2-3 weeks. That’s more than 4x as fast as a typical bank loan. A ROBS is not a loan so there is no debt and there are no future payments required by a lender.
In most cases, buying a business is time sensitive. If your acquisition is delayed, the seller may simply decide to go with another buyer and you’ll lose out on the opportunity. This is why many people who could qualify for a bank loan to buy a business choose not to.
If you have sufficient money saved in a retirement account you could opt for a ROBS instead, which is easier and funds faster than a traditional loan. If you have at least $50K in a 401(k), IRA, 403(b), or another eligible retirement account, you could qualify to work with most ROBS providers. It’s a great way to get the money you need without saddling your business with debt from day one.
A ROBS has a number of requirements during the setup phase, and even after you use it to fund your business. That’s why we recommend working with an experienced ROBS professional so that your business is protected. A ROBS typically costs ~$5,000 to set up and ~$140 per month to manage. You can learn more by reading our guide on ROBS transactions.
Our recommended firm for a ROBS transaction is Guidant. They have helped over 11,000 businesses invest over $3 billion in starting or buying a business. You can sign up today to receive a free consultation to learn more.
3. Seller Financing
Seller financing happens when the owner you’re buying your business from agrees to finance part or all of the purchase price. This can help borrowers with less than prime credit profiles gain access to affordable financing they may be unable to get otherwise. It also gives you an even larger amount of confidence in the business, since the current owner is willing to invest in your success.
Typically, sellers open to offering seller financing will finance around 15-60% of the purchase price of the business they’re selling. The rates on seller financing are usually similar to prevailing market rates (an APR of 6-10%) and are fully amortized. These details will vary from deal to deal and are typically a part of early negotiations during the sales process.
Seller financing (or seller carry back) can be used to cover all of a buyer’s purchase or just a portion. If the seller financing will only cover a portion of the acquisition cost, the buyer will often make up the difference with cash, 401k business funding, or an SBA loan.
There are no specific qualifications for seller financing because each seller will have different requirements. Many sellers will check your credit and will want to see a respectable credit score, but you don’t have to be a prime borrower. If your score is 600+, then it should be enough for many sellers that offer financing (check your score for free here).
4. Home Equity Line of Credit (HELOC or HEL)
A home equity line of credit (HELOC) and home equity loans (HEL) might be a good option if you’re willing to put your personal home at risk for the business you’re buying. According to a study by the NFIB, a small business activist, around 25% of small business owners have used a home equity line to at least partially fund their business.
A HELOC and HEL are similar because they use the equity in your home for financing, but how you receive the money is a little different. With a HELOC, you get a credit line similar to a credit card that you can draw against until you hit your limit and you only pay interest on what you borrow. A HEL is a one-time loan where you receive all of the funds up front and pay interest on all of it via amortized monthly payments.
To use a HELOC or HEL you’ll need a minimum of 20-30% equity in your home and a 620+ credit score. These loans can be less expensive than even traditional bank or SBA loans, and the only collateral used is the home you’re using to borrow against. This is a very flexible form of financing where you can use the funds for anything you want, including buying a business.
To learn more about which home equity financing might be right for your situation, read our article about both HELOC and HEL. If you’re shopping for a home equity line of credit, you can reach out to one lender at a time hoping you find a good deal. Or, you can visit an online marketplace, like LendingTree, and review offers from multiple lenders at once. Save time, shop smart, and find a HELOC that fits.
5. Buy a Business With Friends & Family Financing
Borrowing from friends and family is very common for new businesses. In fact, according to National Venture Capital Association, around 24% of all startups get a private loan from either family members or close friends.
Buying a business that is currently in operation will likely cost more than you can raise from the people you’re closest to, but it could be an excellent resource to get a piece of the capital stack you need. If you’re going to borrow money from friends and family, we recommend that you make it an official business transaction. The transaction should be in writing, and you should make payments on the money you borrow like you would with any other loan.
If you’re going to borrow money from friends and family, the transaction should be in writing and you should make payments on the money you borrow like you would with any other loan. Key to this is to never commingle funds (mix personal and business funds). And there’s no reason to make this mistake when opening a business checking account is so easy. Check out all business checking accounts or get started with our recommended provider,
Financing Options to Buy a Business Pros & Cons
Down payment as low as 10%
More paperwork and slower application process
Harder to qualify for than other financing options
No taxes or penalties for early withdrawal
Can be used as a down payment or combined with other financing
Setting up a ROBS is fast
Risking your nest egg
Low interest rate
Can negotiate terms with seller
Usually only covers a portion of the purchase price, so must be combined with other financing options
Friends & Family Loan
Often inexpensive (low rates, flexible lender)
Only available if you have wealthy friends/family
Business Acquisition Loan Timeline
When buying a business, there is generally a timeline that you can expect to follow before you get to closing. It’s important that you make sure your financing timeline fits into the timeline of the overall business closing process and that you have the right documents prepared at the right time.
Here’s a typical small business acquisition timeline and process:
Initial Inquiry – (Time: 1 Week)
To learn about the business opportunity, you’ll typically sign an NDA in order to receive some basic information. Business brokers typically like to receive an indication of interest in buying the business within 1 week after receiving any preliminary data.
Data Request – (Time: 2-3 Weeks)
If you have a high level of interest in buying the business, then you’ll typically request additional information to help you make a decision. This is a good time to start preparing for your business acquisition loan by gathering necessary loan documents and reaching out to potential lenders.
Letter of Intent (LOI) – (Time: 1-2 Weeks)
At this stage, if you want to move forward with the business, you’ll submit a non-binding letter of intent with your expected offer. If accepted, this is when the business will want to know how you plan to fund the purchase.
You should get a pre-approval letter from your financing company at this point. This is where the initial negotiations are done on things like purchase price and seller financing.
Full Company Review – (Time: 1-2 Months)
Once the LOI has been accepted, you’ll be able to review all available information on the company. This is where you get to decide for sure if you’re going to move forward with buying the business. You should also be setting up your financing during this period by working with your lender and submitting all necessary documentation.
Purchase Agreement & Closing – (Time: A Few Days to A Few Weeks)
This is where a purchase agreement is negotiated, signed, and closing takes place. At this point your financing should be ready to fund so that you can hit your closing date and not lose the business to an impatient seller.
Frequently Asked Questions (FAQs)
What Types of Business Acquisitions Do Banks Prefer?
Banks like certain types of business acquisitions, because over time these businesses and industries have performed better and more consistently than others. They like safe businesses where the buyer has a lot of industry experience. Some of these businesses include:
- Professional Services (Accountants, Lawyers, etc..)
- Medical Services (Doctor, Dentist, etc..)
- Partner Buyouts
What Types of Business Acquisitions Do Banks Not Like?
Banks don’t like risky businesses or businesses with small margins. Some of these examples include:
- Vice industries
- Grocery Stores
- Hard to explain product based businesses
- Businesses who rely heavily on a single customer
How Do I Also Buy a Business’s Real Estate?
Buying commercial real estate along with a business does two things right away: it will increase the business assets and collateral but also increase the asking price. If your acquisition includes the purchase of real estate, then you should consider an SBA 504/CDC loan for that portion of the purchase. 504 loans are typically the cheapest option to finance commercial real estate purchases.
What if I Already Own Another Business?
Lenders refer to other businesses in your name as “associated businesses.” If you have an associated business in which you have a 20% or greater stake, the lender will want to examine the financial health of that business as well. They must make sure that an associated business doesn’t pose a significant risk to your finances and/or your ability to pay down the loan you’re asking.
How Do I Find the Right Business to Buy?
Often times, business brokers will be experts in both the buying and selling of a business. Their expertise can be invaluable when it comes to understanding the market, the available inventory, expected price ranges, typical seller financing offered, and much more.
By providing them with an idea of what you’re looking for, your price range, and your timeline, you may save yourself a great deal of effort and time. You can also look to get an attorney to represent you in finding a business, network to find opportunities, or reach out to specific businesses you want to target.
What is a UCC Lien and How Does it Affect Me?
A UCC lien is a public notice that someone is using some asset or group of assets as collateral for money that is owed to them. Whenever you take out a loan to buy a business, there is a high chance that your lender will want your business assets as collateral.
If you pledge your assets as collateral, the lender will likely file a UCC lien to make sure any future financing you want to get is aware of their claim to your assets. It doesn’t hurt your business unless you’re trying to get additional financing. You can learn more by reading our guide on UCC liens.
Will I Have to Sign a Personal Guarantee to Buy a Business?
Unless you’re able to pay cash for the business you’re buying, it’s likely that you will sign a personal guarantee. Personal liability is often hidden behind limited liability companies and other corporations today. However, your lender will want access to other assets in case you default. They also want to make sure you’re fully engaged in the success of the business.
What Options Do I Have if I Don’t Have Enough Cash for a Down Payment?
If you don’t have cash savings available to you, there are other alternative options available to you. Most of these are options we’ve mentioned as alternatives to an SBA loan to buy your business, but they can also be used as a downpayment.
ROBS (Rollover for Business Startup)
One popular way of coming up with a down payment is to use money you’ve saved in a retirement account, and a ROBS let’s you do it without paying taxes or withdrawal penalties.
We advise using a ROBS only if you have at least $50,000 in your retirement account that you plan to use. In addition, it’s best to use a professional ROBS provider, like Guidant, to assist you with this process as the tax and legal issues involved are very particular.
Cash Out Your IRA or 401k
Another retirement account option is to cash out your retirement accounts. We don’t recommend this option due to the heavy taxes and penalties you’ll have to pay, but it could get you access to the funds you need for a downpayment on an SBA loan.
If you’re in the lowest tax bracket then you may not be hit very hard, but you’ll have to pay gross income taxes at the federal and state levels, and pay a 10% penalty on top of it. You can learn more about how to buy a business with your 401k or IRA by reading our article.
Home Equity Loans and Home Equity Lines of Credit
If you’re a homeowner, you can use a home equity loan (HEL) or a home equity line of credit (HELOC) to come up with a down payment. After all, many HELs AND HELOCs can have great interest rates and generous terms. On the other hand, by utilizing a HELOC or HEL you reduce the equity available in the property being used as collateral for your business loan.
Bottom Line – How to Get a Loan to Buy a Business
The question of how to get a loan to buy a business has a number of answers. In the end, financing a business acquisition requires careful planning and analysis of all your options. SBA loans are a good place to start, but you should expect a lengthy process of document collection and lender review that can last up to 120 days or more.
When considering how to get a loan to buy a business, you can use a ROBS to fund your purchase or as a downpayment for an SBA loan. It can give you the flexibility and funds you need within a few weeks.